Excluding utility rebates from gross income. (Federal Taxation)

by Beatty, Warren A.

Abstract- The recently enacted Comprehensive National Energy Policy Act of 1992 has clarified much of the confusion surrounding the taxation of utility rebates. The act has introduced the new IRC Code Sec 136 which provides that energy conservation subsidies, including the rebates given by public utility companies to encourage customers to buy energy-efficient appliances and products, will not be considered part of the gross income of the recipients. Furthermore, the new law addressed many of the ambiguities associated with the expired National Energy Conservation Act of 1978. Enacted in Oct 1992, the act sets certain limitations to exclude rebates from energy-saving measures not related to residential properties. Two of these limitations are discussed.

Utility companies often use rebates to encourage customers to purchase
more efficient heating or cooling equipment and other energy-saving
devices. The recently enacted Comprehensive National Energy Policy Act
of 1992 provides for the exclusion from gross income of certain energy
conservation subsidies received by public utility customers. In
addition, it clears up much of the uncertainty that existed under prior
law concerning the taxability of many utility rebate programs.

Two of the most popular types of utility-rebate programs are known as
"load-control" and "load-management" programs. Under a load-control
program, a utility installs devices that permit it to reduce the amount
of energy furnished to participating customers during peak-demand
periods. Under a load-management program, participating customers
acquire, at their own expense, certain energy efficient appliances or
certain products such as storm windows. These energy efficient
appliances and products may be obtained from the utility or from an
unrelated third party.

Prior Law

To encourage the purchase of energy-saving appliances, the National
Energy Conservation Act of 1978 allowed utility customers to exclude
from their gross income the receipt of utility rebates. The expiration
of this provision, June 30, 1989, casted a shadow upon the excludibility
of rebates received under many utility-rebate programs.

Unlike that of other more traditional rebate programs, load-control and
load-management utility-rebate programs do not satisfy all the
requirements described in Rev. Ruls. 76-96 and 84-41 concerning non-
taxable rebates. For example, one of the requirements of Rev. Rul. 76-96
is that the amount of the rebate must be based upon the purchase price
of the acquired asset. However, many utility-rebate programs base the
amount of the rebate upon the amount of reduction in the customer's
energy consumption.

An example of this type of arrangement in the context of a load
management program is contained in PLR 8924002. The IRS ruled that where
an exempt electric cooperative made cash payments to its customers who
installed alternative heating equipment, such payments were includible
in the recipient's gross income.

In Rev. Rul. 91-36, the IRS addressed the issue of non-cash incentives
received by customers of electric utility companies who participated in
energy-conservation programs. The IRS ruled that non-cash incentives
such as rate reductions or non-refundable credits were nontaxable to the
electric utility customer.

The Comprehensive National Energy Policy Act of 1992

In October of 1992, the Comprehensive National Energy Policy Act was
enacted into law. This act amended the IRC by redesignating IRC Sec. 136
as IRC Sec. 137 and by introducing new IRC Sec. 136 effective for
subsidies received after December 31, 1992.

Under the new IRC Sec. 136, the value of any subsidy provided (directly
or indirectly) by a public utility to a customer for the purchase or
installation of any energy-conservation measure is excluded from the
customer's gross income. For purpose of new IRC Sec. 136, public utility
means any person engaged in the sale of electricity or natural gas to
residential, commercial, or industrial customers for their own use.

An energy-conservation measure is defined as any installation or
modification primarily designed to reduce consumption of electricity or
natural gas or to improve the management of energy demand. If the energy
conservation measure relates to a dwelling unit, then the entire rebate
amount can be excluded from the taxpayer's gross income. For this
purpose, a dwelling unit is defined in IRC Sec. 280A(f)(1) as a house,
apartment, mobile home, boat, or similar property. As a result, cash
rebates received by residential utility consumers who install energy-
saving appliances or devices under load-control or load-management
programs would appear to be excludible from income under new IRC Sec.
136.

However, to exclude rebates received from an energy-conservation measure
relating to property other than a dwelling unit, several limitations
exist. The rebates must be due to installations or modifications
occurring on or after January 1, 1995. Another limitation is that the
percentage of the subsidy excluded from gross income during 1995, 1996,
and 1997 (and later years) will be 40%, 50%, and 65%, respectively.

Property other than a dwelling unit also includes specially defined
energy property. This term is defined as a recuperator, heat wheel,
regenerator, heat exchanger, waste heat boiler, heat pipe, automatic
energy control system, turbulator, preheater, combustible gas recovery
system, economizer, alumina electrolytic cell modification, chlor-alkali
electrolytic cell modification, or any other property of a kind
specified by regulation by the Secretary of the Treasury. This property
must be installed with an existing industrial or commercial facility and
the principal purpose for its installation must be to reduce energy
consumption.

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